應用材料 (AMAT) 2007 Q3 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to the Applied Materials third quarter fiscal year 2007 earnings conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards you will be invited to participate in the question-and-answer session.

As a reminder, this conference is being recorded today, August 14, 2007.

I would now like to turn the conference over to Mr.

Randy Bane, Vice President of Investor Relations, Applied Materials.

Please go ahead, sir.

Thank you, operator.

Good afternoon and welcome to Applied Materials fiscal 2007 third quarter conference call.

Joining me on the call today are Mike Splinter, President and CEO, George Davis, Chief Financial Officer and Joe Sweeney Senior Vice President, General Counsel, and Corporate Secretary.

Today we'll discuss our results for the period ending July 29, 2007.

The financial results were released this afternoon at 1:06 p.m.

pacific time.

A copy of the news release is available on business wire and on our website.

www.AppliedMaterials.com.

You can access our slide presentation supporting today's discussion on the Investor Relations section of our website.

Today's earnings call contains forward-looking statements including those relating to Applied's performance, its technology leadership, operational efficiencies, business strategy, growth opportunities, cash generation and deployment, solar strategy and planned acquisition and targets, customer spending and fab utilization trends and the industry outlook and drivers.

Our forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Information concerning these risk factors is contained in today's earnings press release and in the Company's filings with the SEC.

Forward-looking statements are based on information as of August 14, 2007 and the Company assumes no obligation to update such statements.

Today's call also contains non-GAAP financial measures.

Reconciliations of these measures to GAAP measures are contained in our earnings press release issued today and on our investors earnings call highlights presentation, both of which are available on the investor page of our website.

George Davis will lead the call with a discussion of our financial performance for the third quarter.

Mike will follow with highlights on the current industry environment and company progress.

George will close our commentary with our targets for the fourth fiscal quarter of 2007.

After these remarks we will open the call for questions.

With that I'd like to turn the call over to George.

George?

Thank you, Randy, and good afternoon, everyone.

I'll make a few comments on our overall results for the quarter before discussing our four segments.

For the quarter, our results were within the range forecasted for orders and revenue and exceeded our target for earnings per share.

Orders came in at the low end of our range as the expected slow down in DRAM orders was compounded by weaker than expected orders from foundry and display customers.

The strong financial results were driven by the performance of our Silicon Systems Group, offsetting weakness in display and services.

The Company also showed strong cash flow and improved balance sheet performance in the quarter.

For the quarter, orders were down 14% both year-over-year and quarter-over-quarter.

We had expected orders to be down in the range of 10% to 15%.

Backlog at the end of Q3 decreased slightly in line with the book-to-bill ratio.

Backlog adjustments for the quarter were positive at $34 million.

As a reminder, our backlog does not include solar contracts for thin-film production lines.

Revenue was up 1% in Q3 compared to both last quarter and to Q3 of last year.

Gross margin increased 2.6 points to 47.5% in Q3.

Q2 gross margin included charges of $50 million, about 2 points, related to our decision to cease development of Bean Line Implant products.

Third quarter operating expenses were essentially flat with Q2.

Head count at the end of Q3 was 14,465 employees.

EPS of $0.34 per share was $0.02 above our target range and was an increase both quarter-over-quarter and year-over-year.

Non-GAAP EPS of $0.37 per share was also an increase quarter-over-quarter and year-over-year.

Non-GAAP adjustments are detailed in the press release.

Now, I will discuss our segment results.

Mike will provide further comments on the industry conditions impacting the segments in a few minutes.

The Silicon Systems segment includes our semiconductor capital equipment in etch, front end, thin-film, CMP and inspection.

Q3 orders were down 17% from Q2 levels as DRAM customers lowered their capacity additions in line with expectations while foundry customers ordered at below anticipated levels.

NAND flash orders increased at expected levels and logic customers maintained their order pattern for the year.

In Q3, memory accounted for 74% of orders.

Our order composition was DRAM 42%, flash memory 32%, logic and other 20%, and foundries at 6%.

Orders for 65-nanometer and below technology represented 58% of silicon orders.

Silicon net sales were up 2% versus Q2 and up 8% year-over-year, reflecting continued strength in memory.

Foundry spending during the quarter was also up in contrast to order activity.

Operating income increased to just under 40% of revenue due to higher gross margin performance, strong flow-through from higher revenue levels, and product mix.

In silicon we remain focussed on our long term programs to improve cost efficiency in manufacturing through merchant transit and global low-cost sourcing.

Our recent change to a consolidated Silicon Systems Group is expected to provide a better structure for delivering these key benefits.

Our fab solutions segment consist of the services business that delivers products to improve the operating efficiency of our customers' factories and includes spares and refurbished equipment sales.

Fab solution orders declined 6% from Q2 as logic and foundry utilization did not increase at the anticipated rate.

Sales increased 2% over Q2, due to higher software revenue, partially offset by lower spare sales.

Sales decreased 8% year-over-year due to lower sales of remanufactured equipment.

Operating income was slightly lower than Q2 due to product mix and increased operating expenses associated with the Brooks Software business.

Fab solutions remains heavily influenced by wafer starts and fab utilization which has impacted growth this year.

As we have experienced a longer trough in utilization than expected at the start of 2007.

We have also recently seen certain customers reducing spares purchases as part of their own internal cost reduction initiatives.

The display segment includes products and services for manufacturing flat-panel displays.

Display also manufactures the large area of deposition tool used in thin-film solar lines.

We had expected to see a recovery in flat panel display orders this quarter, however customers have not resumed their capacity expansion plans.

Display orders were $90 million up modestly from Q2 but down 61% from Q3 of last year.

Display revenue was up 2% from Q2 as we continue to benefit from the robust orders from last year.

Operating income increased to 25.2% of revenue from the trough experienced in Q2.

Cost reduction measures and product mix changes accounted for the bulk of the operating improvement.

The adjacent technology segment includes products and services for manufacturing solar cells, high throughput roll to roll coating systems for flexible electronics and tools for energy efficient glass.

Orders were down $10 million from Q2 and sales were down $14 million from Q2, reflecting the volatile order and revenue dynamics of the industrial glass and web businesses.

The operating loss for adjacent technologies was $29 million, due to lower revenue and increased R&D investment to support our solar entry.

Solar activity remains high with the announcement of three more contracts for thin-film solar production lines, and the announcement of the agreement to acquire HCT Shaping Systems.

Our solar contracts now exceed the $400 million goal that we set at the end of Q2.

Corporate and unallocated expenses of $189 million were up 17% over the previous quarter due to the absence of certain favorable one-time benefits in Q2 and increased spending on variable compensation and corporate R&D programs.

Spending in this category was down 3% year-over-year.

Next I will discuss our balance sheet and cash flow.

We continued to have strong cash flow performance generating $638 million in cash from operations which represented 25% of revenue.

Free cash flow in Q3 was $565 million or 22% of revenue up from 17% in Q2.

We define free cash flow as cash provided by operating activities less capital expenditures.

Working capital performance benefited from a decrease in inventory of $109 million.

Capital spending for the quarter was $73 million, and depreciation and amortization totaled $63 million.

During Q3, Applied returned $483 million or 76% of operating cash flow to its stockholders.

Of that total $400 million was for share repurchases that retired 20.1 million shares at an average price of $19.91, and $83 million was used for dividends.

We remain committed to generating strong cash flows, managing the balance sheet to maximize asset utilization and returning capital to our stockholders.

Since the beginning of 2006, we have returned $5.6 billion to stockholders through stock repurchases and dividends.

We provided these cash returns while maintaining our R&D investment on pace with the highest levels in our history.

Cash and investments at quarter-end grew by $390 million to $3.76 billion, from $3.37 billion in the previous quarter.

Net cash proceeds related to employee stock option exercises was approximately $270 million during the quarter.

In Q4 we anticipate larger than usual cash outlays, including $475 million for the pending HCT acquisition and $200 million for scheduled debt retirement.

Additionally, we intend to make stock repurchases of between $300 million to $400 million.

In summary, Q3 was a strong quarter financially and operationally for the Company despite a soft order environment.

Now, I will turn the call over to Mike Splinter to provide the CEO's perspective on key things for the quarter and on the industry environment.

Mike?

Thanks, George.

Good afternoon, and thanks to all of you for joining us today.

As you know, Applied's strategy is to utilize nano manufacturing technology to solve key technical challenges, drive higher returns for our customers, and accelerate growth in new markets.

As George summarized, memory stood out as the driver of our business this quarter, while foundry orders were weaker than expected.

Service and display were essentially flat.

At the same time demand for solar is growing and we are building the capabilities to be the solar technology leader.

Our results this quarter illustrate our ability to execute in a changing environment, and adapt quickly to the needs of our customers.

Thanks to the many talented people we have at Applied, we have made significant achievements during the quarter and this year.

Recently we created the Silicon Systems Group under the leadership of Tom St.

Dennis, a strategic move which consolidates our semiconductor equipment divisions in one organization to extend our leadership in innovation, improved customer satisfaction, and operational efficiencies.

Our customers are facing increased process complexities and shortened product life cycles, resulting in higher R&D costs to introduce the next technology node.

Applied is leading by delivering innovative technical solutions, such as high K metal gate and double patterning.

In etch we've been extending our position in memory advancing particularly in metal and silicon etch.

We released the Karena etch system for high K metal gate and made our first customer shipments during the quarter.

We are addressing our customers' need to improve their product cost with higher productivity tools.

One example of the importance of improved productivity is the unprecedented demand for our Producer GT system.

Just nine months after launch, we shipped our 100th system demonstrating one of the fastest ramps of any new product in the industry.

In addition, our Sokudo joint venture has begun shipments of an upgraded track system focussed on the leading edge immersion lithography applications.

This system leads the industry in enhanced defect in critical dimension control that are so important for the next generation of ICs.

In fab solutions we're enabling customers' success through superior service solutions.

We are transforming our service business with a suite of new products that improve the efficiency and lessen the environmental impact of semiconductor manufacturing.

Since opening in June, our wafer reclaim center in Taiwan has already processed more than 8,500 wafers, using its patented process and is qualifying five new customers this quarter.

In the display area, growth in sales of LCD-TVs was significant in the first half of 2007, up 65% year-over-year.

Despite this fact, we expect capital spending by display manufacturers to be down 30% to 40% this year.

Our expansion into new product lines and share gains in existing products will help our results as display orders start to improve in Q4, however, long lead times in this business will not result in revenue improvement until the second half of fiscal '08.

On a positive note, we are excited to see a leading panel-maker announce its intention to move to Gen 10, the next larger glass size.

In adjacent technologies, Applied Materials is leading the drive to create new solutions to generate and conserve energy, with a focus on lowering the cost of producing solar electricity.

Our thin-film technology is gaining broad acceptance and we recently started shipping equipment for our first thin-film solar production line.

Meanwhile, we signed an agreement to acquire HCT Shaping Systems to broaden our capabilities in the fast-growing crystalline solar cell technology arena.

We expect this acquisition to close within the next 30 days.

With solutions for both crystalline and thin-film, we are rapidly becoming the technology leader in solar.

Our confidence in our core business and new markets is underscored by three factors: Our new products are focussed on customers' key technical challenges in growing markets, our initiatives on cost and performance are advancing, and, finally, we have the technical talent and global organization to achieve our vision.

With that said, I would like to share our view of the market environment.

In the memory market, bit growth is well ahead of expectations and despite dramatic price reductions in both NAND flash and DRAM during the first half of the years, customers still have the confidence to invest in advanced capacity to lower process cost and to enable higher density devices.

And unit demand is strengthening not only due to seasonality, but also new applications.

Products like the iPhone will require far more flash memory per unit to accommodate the rich content people desire.

We are also well on the way to seeing flash incorporated into hard drives, for faster boot-up and ultimately solid-state drives for greater mobility and longer battery life.

Flash memory is now leading the technology evolution and becoming increasingly important to our new product development.

DRAM pricing is improving in recent weeks as excess capacity is being consumed.

Cell phones and PCs are creating robust bit growth ahead of forecast.

The adoption of Microsoft Vista operating system began this year with consumers.

Corporate adoption won't be significant until next year and will continue into 2009 further expanding DRAM bit growth.

The foundries are reporting record sales with positive momentum expected to continue into the fourth quarter.

Industry consolidation and R&D favors the foundry model.

Utilization at foundries is moving into the 90% range indicating the need to add capacity, however, little capacity has been added this year as customers have stretched their existing lines and the 65-nanometer ramp is taking longer to develop than we had anticipated.

Overall our view is that equipment spending will be slightly lower in the second half of the calendar year primarily due to foundry spending not materializing.

While foundry remains weak, we expect memory capital investment to remain relatively strong and logic to be flat.

Flat revenue in the fab solutions market reflects lower than expected utilization and logic in foundry as well as lower remanufactured equipment sales.

These elements have slowed our growth in AGS, but with new products and increased focus in Asia, we expect a return to growth in the upcoming quarters.

Our solar customers are increasingly more confident that thin-film technology is the lowest cost per watt solution, and has a major role in the solar technology landscape.

The number of thin-film production line contracts continues to increase, therefore, we are raising our 2007 goal from greater than $400 million to greater than $600 million.

In closing, Applied Materials is well prepared for the growing opportunities ahead.

We're building share in the new critical applications in semiconductors, gaining traction on our new service products, navigating through an investment downturn in display, and increasing our product offering and penetrating the fast-growing solar market.

Thank you very much.

Now, I'll hand the call back over to George for some commentary on our targets, then we'll pleased to answer any of your questions.

George?

Thank you, Mike.

With the industry dynamics that Mike just summarized as a foundation, here are the targets for Applied's fourth quarter.

We expect orders to be in the range of flat to down 5% with reductions in silicon orders partially offset by improved orders in display and fab solutions.

We expect revenue to be down in the range of 5% to 10% with lower revenue predominantly from DRAM and foundry customers, partially offset by increases in fab solutions.

We expect EPS to be down in line with revenue and in the range of $0.26 to $0.29.

Randy, let's now open the call for questions.

Operator, will you please begin with the first question.

Operator?

(OPERATOR INSTRUCTIONS)

Your first question comes from Stephen Chin with UBS.

Great, Thank you.

On the order guidance, how should we think about the silicon business unit?

Do you get the sense that the silicon business unit orders will trough in the October quarter, and just as a follow-up to that, how sustainable do you think this 39% operating margin level in the silicon business going forward especially since you've created this new Silicon Systems Group?

Maybe I can answer the first part of the question, Stephen and let George answer the second part of it.

I really think the question gets down to what is going to happen in foundries and we're really not going to know that until maybe October.

We see this quarter being certainly weaker than we anticipated, but we see DRAM and flash continuing their strength with confidence by those manufacturers to continue their investments particularly because of strong unit demand and strong bit growth.

George?

Yes, on the gross margin end, I think, obviously they had a very big pickup quarter-over-quarter.

We would expect that they're going to continue to drive improvements in operating profit.

I think you have some mix issues that assisted in Q3 that you can't always rely on being there in out quarters but we certainly expect that through the combination we're going to improve both gross margin and operating margins.

Operator?

Your next question comes from Satya Kumar with Credit Suisse.

Yes, thanks for taking my question.

In your October guidance you mentioned earlier in the call that a CP acquisition closes in a month.

How much of that CP is baked into your revenues in August, and October?

None.

Okay, and secondly, when you talk about bookings down about flat to down 5%, how much is memory bookings down, do you think, for you from peak to trough within that guidance in October?

Well, as you know, DRAM bookings were off in our Q3, they're roughly flat going into Q4.

Flash was very high for us in Q3.

So it's down a bit, but when you look at our overall, all bookings we expect memory to be in the range that it's been in the last few quarters.

Okay, quick follow-up, in your solar contracts, now that they're tracking above expectations, can you remind us of where we are in terms of where we can expect these contracts--when we can expect these contracts to flow into bookings and revenues?

Thanks.

Sure, we expect to begin booking these contracts in the first half of '08, and that the first revenue should come in at the tail end of '08.

Okay.

Next question, please.

Your next question comes from Edward White with Lehman Brothers.

Thanks.

I was wondering, you mentioned that the foundries had lower bookings, revenues increased and they're basically extending their fabs and getting more productivity out of the fabs.

How far do you think they can take that?

At what point do you think they really have to come back in and start investing more?

Ed, we really thought it would be by this time, but if we really look year-over-year, the utilization is down.

When they started ordering last year, their utilization was in the mid-90s.

They haven't quite reached the mid-90s yet but with utilization continuing to move in the positive direction we think that it should be shortly, but right now our projection is for very low revenue in Q4 and from foundries.

Okay, and then, secondly, if the flat-panel display related orders pick up in the fourth quarter, what do you think would be the driver behind that?

Can you give us some color as to what's causing the inflection point there as you go forward?

We've seen a very positive growth in LCD-TV sales.

Prices have been coming down pretty dramatically in the first half of the year, volume picked up 65%, that absorbed a lot of the capacity, and as long as consumer spending stays strong during the second half of the year, we think that companies are going to reinvest, people have held back on Gen 8.5, and now we see one of the major manufacturers talking about Gen 10.

So there starts to be a pretty big spread from the leading manufacturers to the trailing manufacturers.

So I think, really, it gets down to the growth in the LCD-TV sales.

Great.

Thank you.

Thank you.

Your next question comes from Patrick Ho with Stifel Nicolaus.

Thanks a lot.

Just a quick question first for George.

In terms of the--I think the $19 million in the items associated with acquisitions, is that all in G&A or is there any in cost of goods?

That should all be in--mostly in G&A.

Mostly in G&A.

Okay, great.

And question for you, Mike, just following up Ed's questions about the foundries, in terms of the 65-nanometer adoption, what do you think is causing the delays or the slower than expected adoption of that technology node?

Well, we think it is really cost crossover.

Those products absolutely need 65-nanometers are all ready on 65-nanometers.

I think the bulk of the customers are waiting to see that they're going to get a cost savings by moving to 65-nanometers or other kinds of performance benefits, but I think that's the big thing.

Our yield is high enough, our production costs low enough to drive a bulk of the products over to 65-nanometer.

We think that there are plenty of products that are now getting qualified on 65.

Great.

Thank you.

Your next question comes from Harlan Sur with Morgan Stanley.

Thank you and good afternoon.

Mike, with a good portion of the installed NAND memory capacity at 200-millimeters and with the road map for flash going to sub 55 next year, are more of your NAND customers now positioning to transition 300-millimeter in a more accelerated manner than your prior views?

Well, you can already hear a number of companies talking about dispositioning their 200-millimeter capacity, Harlan.

Our view is that over the next couple of years, their needs would be about 200,000 equivalent, 300-millimeter wafers created to replace those aging 200-millimeter factories where they're really not going to be cost competitive.

That is the real issue, is as prices come down, and 300-millimeter density goes up, the 200-millimeter products are really not--200-millimeter fabs are not competitive any longer.

So, I think we're going to see an increased movement next year in the end of 2009.

Okay, great, and then question for George.

Great job on the margins.

As it relates to the gross margin improvements, how much of that was a richer mix because of equipment sales of sub 90-nanometer technologies where you have higher ASPs?

I would say in general, I can't be that specific, but the silicon group drove the improvement in gross margin and obviously you had in Q2 of about two points of gross margin impact that--but even if you take that out, margin was up quarter-over-quarter despite the softness in some of our other segments, so it was really an outstanding performance by Silicon Systems Group.

Okay, great.

Thank you.

Your next question comes from Gary Hsueh with CIBC World Markets.

Yes, hi, thanks for taking my question.

My question relates to your fab solutions business.

Specifically, George, since that business is starting to pick back up, if I look at fab solutions over the last three quarters it seems on higher revenue you're seeing a little bit of operating margin compression.

Can you walk me through what kind of mix issues might have been affecting that or influencing that and sort of what to expect in terms of operating margins if fab solutions start to pick up, is there any kind of step function to the upside here since we've seen such a gradual decline in operating margins there?

Good question.

What you are really seeing between the--just between quarters has really been the addition of operating expenses as we take in the Brooks software division into the group, and we have pretty flat revenue, and so I would say the margin erosion that we've seen is really some of the drivers that we've talked about where we've seen both refurb and spares softer than expected, which has brought down the operating margin.

I think, as you see the refurb markets and spares group picking back up, then that will be have some leverage into margin.

But again, if you look out over time, they have been having an operating margin somewhere between 25 and the high 20s and they are certainly at the low end of that, but even as recently at Q1 they were at about 28%.

So I think you're just seeing some softness based on the factors we were talking about.

Okay, if I could ask just one quick follow-up here for Mike.

Mike, you mentioned Sharp and their Gen 10 project, and it seems like they're the first customer that's potentially running both LCD panels and thin-film solar panels together to sort of balance out utilization rates.

Is that true and is that a trend we could see with other kind of higher-Gen flat panel manufacturers?

Well, I don't think we're quite sure about the architecture of their line right now and how that's going to really be created, but obviously the most expensive pieces of equipment are common between flat panels and thin-film solar cells.

So it can give them an opportunity to improve their overall factory utilization, but we have to have a lot more discussions before we clearly understand how they're going to architect that factory.

Okay, great.

Thank you.

Your next question comes from Timothy Arcuri with Citigroup.

Hi, guys, couple of things.

Mike, you mentioned that you think about--you have to replace about 200,000, 300-millimeter equivalents in NAND.

It's something that's about $9 billion that has to be spent.

Is it reasonable a., that that's spent maybe over the next two years, and do you have an estimate for what might have to be spent in DRAM to replace all that eight inch capacity?

You're roughly--your numbers are very close to ours.

200,000, 300-millimeter equivalents over the next two years.

It is difficult to tell exactly how that's going to go.

It will depend on the market but we certainly think by the end of 2009 those have to be replaced.

We think that there is something not maybe as big as 200,000 for DRAM, but a significant amount of capacity that has to be replaced for DRAM, as well.

Okay, and then, Mike you're kind of keying a pickup in bookings to the foundry business, and I guess as you kind of look at what is gone on in foundries, foundries are at record sales as you cited, the seem to--utilizations increase.

Obviously you have very big exposure there as well and yet you're booking close to record lows out of those customers.

So do you think that there is something structural actually going on there?

I know that they're trying to extend their factories but it seems like maybe there is some kind of a mix shift going on with respect to their customer base that's-- that just makes them not have to spend as much money.

There is a couple of things going on.

One is they are extending their utilization further up before they start buying capacity.

If you look over the last couple of generations, it has gone from 85% to 90% to 95%, and it's getting, I think, now maybe close to 100% utilization before they add capacity.

The other thing is just the growth of the 65-nanometer node is not as fast as we thought it would be relative to the number of products we've seen get qualified on 65-nanometer.

So I think those two are structural changes that we're seeing, but we've also seen that when we look at CapEx per revenue for the foundry it has been dropping for a few years, leveling off, something around 10%, but that seems really quite low for a very capital intensive sort of company.

So we're still thinking that the orders have to come back relatively soon and as 65-nanometer ramps in a major way, it should be a fairly substantial order pattern from foundries.

Okay.

Thanks.

Your next question comes from Mark FitzGerald with Banc of America Securities.

Thank you, on the Gen 10 equipment, can you give us some idea of when that is going to be ready to ship at this point, and as it pertains to the solar market, how important or--in terms of opening up building-integrated photovoltaics is the Gen 10?

Well, we think the Gen 10 will ship sometime late fiscal year or next year.

As far as building integrated photovoltaics, obviously even with Gen 8.5, you can you do it, but architectural glass is kind of in the 3 to 3.2-meter range.

Gen 10 or modified Gen 10 should be able to handle that, Mark, so that is an area that we're quite excited about, and as we design our Gen 10 platform, we're going to make sure that it can handle the largest sizes of architectural glass.

Just a quick follow-on.

Can you give us some idea of what the spares in service in the solar business mean in terms of a revenue opportunity.

Is it kind of the same level as semi-conductors, above or below?

We think it is going to be an attractive business but we're really just in the process of sorting that now with our customers, as we're folding these lines together.

We'll cover that in some detail at the Analysts' Meeting in January.

We're going to try and give a more comprehensive look because we'll be well into these first contracts by then.

Thank you.

Your next question comes from Jay Deahna with JP Morgan.

Hi, it's [Jenny Yunnan] for Jay Deahna.

Seems like you have a lot of moving parts to your gross margin--

We're having a hard time hearing you.

Maybe you can get closer to the microphone.

I'm sorry.

Could you give us some gross margin guidance in 2008 with like all the moving parts, your HCT acquisition, your ramp of solar deliveries, where should we modelling corporate gross margins in 2008?

Yes, I mean, we're not going to give any guidance yet for '08 but we can--just generally the acquisition picture, HCT, won't have a material impact on gross margins in '08 and each of the--each of the groups, I think, has--there is no fundamental deterioration in the gross margin outlook so I think you can kind of model off of today and then just make some assumptions for improvement that we--just general improvement over time particularly in the Silicon Systems Group.

Okay.

Great, and then for foundries, if they do come back and order in October, is that in your guidance, or is that upside to your guidance?

Our guidance has very low orders for foundries in our Q4.

Okay.

Great.

Thank you.

Your next question comes from Stephen O'Rourke with Deutsche Bank.

Thank you, good afternoon.

Couple questions, first, I hate to beat a dead horse, but are the foundries telling you anything different now than they told you three months ago?

Well, if you look at our revenue in Q3, we had an uptick in foundry orders that we delivered in the quarter.

We had some good turns business, and so we--three months ago we kind of expected that trend to continue throughout the year, and it's not, and so, yes, there is a fairly substantial difference between now and May.

Okay, and of all of the solar PV and morphous silicon lines that you've signed to date, how many are dual junction?

Really only one dual junction contract so far, but one of the interesting things about our single junction lines, that it is always possible to upgrade those in the future.

I would say certain customers are looking at that as an option as they think about their expansion plans.

Fair enough, and is it safe to assume that the start up of that dual junction line is well out into fiscal '08.

Yes.

Okay, thank you.

Your next question comes from Steven Pelayo with HSBC?

Yes, a question for each of you guys.

George, bookings and backlog looking going forward here, specifically kind of tiny in magnitude.

You've got solar coming on in the first half of '08, I don't know if that was fiscal or calendar, you can comment on that.

You've got some service contract renewals that are going to be coming here, HCT being added in and then you've even got foundry at a record low and (inaudible) bouncing off the bottom.

It seems like you guys got a fair amount of cushions, if you will, looking forward.

Can you comment a little bit on kind of timings of how we add in some of those solar and service contract renewals and HCT impacts, and then, Mike, do you think these cushions can allow October bookings to actually be a quarterly trough?

Let me start with the, again, on the--for the thin-film solar lines and let me start to differentiate now because obviously HCT will have a different backlog picture than that.

We believe that we'll start booking these things sometime in the first half of '08, fiscal or calendar, it is pretty close.

So I won't differentiate too much there.

I think I would put it safely in the latter half of fiscal--of the latter part of the first half of fiscal '08 if that is not too confusing.

On HCT, we would obviously, we'll take their backlog in when the deal closes, which we hope will be within the next 30 days.

So, Steven, as far as Q4 being a quarterly trough, I think the real question, again, will be how sell-through goes in back to school, and holidays.

Our checks in Taiwan are pretty positive so far on computer builds and other consumer products for the latter half of the year.

I think those things are going a little bit better than normal seasonality, so we're starting out okay, but, again, it's going to be whether our customers have confidence to invest going into 2008.

At this point we think they should, but I don't think they're going to decide even until October.

Great, thank you.

Operator?

Your next question comes from Robert Maire with Needham & Company.

Robert, are you there?

Mr.

Maier has withdrawn his question.

Your next question comes from Mehdi Hosseini with Friedman, Billings, Ramsey.

Yes, thank you for taking my question.

Question for George and one for Mike.

Given the restructuring that is going on in the silicon business, how many--what would be the impact on the operating costs, especially on the SGA.

I imagine there will be some head count reduction, and then for moving on to the solar side, from what I understand, some of your customers like (inaudible) are actually going to be installing thin-film and base panels beginning in the first quarter of 2008.

So help me understand how these booking and revenue recognition is going to play out, what are the factors that determines the actual recognition as these panels are installed?

And just if I may, squeeze in one more question.

You're talking about 65-nanometer ramp is lower than expected, but at the same time we're hearing that a lot of activity regarding the takeouts for 45-nanometer.

Would there will be a situation where some of these high-end customers are actually skipping some 65-nanometer and jumping onto 45?

I'll go first, then, on the question on the silicon systems cost savings.

Again, the group was just formed, so Tom and his team are looking at what are the opportunities, clearly we think that there's a chance to, like I said, to have savings both on the gross margin line and on the SG&A line.

We're also--there is a real focus on asset efficiency.

Part of the organizational change was to have under one point of accountability, not only the product business groups but manufacturing in the global supply chain, and one of the first things that we did, as the group was formed, was to challenge them to address what we believed to be some excess inventory that had built in the system, and as you see in the quarter, I was very pleased that they were able to really have an impact on that inventory.

So I'm confident we're going to see cost savings.

I'm confident that we're also going to see some other operational improvements in addition to the benefits that we believe we provide to our customers and in terms of our-both the customer service, but also our innovation.

So with that I would just say we'll probably have a better feel as Tom and his team finish their work on this and we can probably talk about it a little bit more certainly by the Analysts Meeting but maybe even by next quarter.

Sure.

George, you want to talk about how we're recognizing revenue in the solar contracts?

Sure.

We'll be recognizing revenue, obviously, when HCT closes.

Let me just talk about HCT because there has been some confusion.

HCT has an established product, so when it comes on, it--we will go ahead and recognize revenue based on their existing business.

The solar thin-film contracts, that are all basically right now first of a kind, we will be basically taking revenues.

We have sign-off on those, and we would expect that at the tail end--first of that at the tail end of '08 and the bulk of what we've talked about so far and then of course in the early part of '09.

But as I mentioned, that we are shipping the first line, so we'll be installed in the first quarter, and we have to meet some performance parameters to get those sign-outs, so the machines have to be started up, the line has to run, modules have to be made.

On the 65-nanometer ramp there is a phenomenon going on that some customers are skipping generations of technology because of the cost of redesigning products, the cost of mass, the cost of starting up a new product.

This phenomenon really started at 130 where customers skipped 130, went to 90 or 130 customers skipped 90 and went to 65.

I am not sure how much of a major trend this is.

I think the trend has already occurred.

So--

Next question.

Your next question comes from Brett Hodess with Merrill Lynch.

Mike, your orders were down on the silicon systems side about 17% sequentially and you commented on a few product lines, but I was wondering, in this softer environment, how you see your share holding up on the semiconductor systems side.

Obviously you've mentioned you're gaining--you think you're gaining some share on memory etch but I was wondering if you could talk overall on that side?

Well, our trend maybe in a couple of directions and then a couple of specifics, Brad.

In memory we continue to gain share, it's been a focus of ours for the last several years especially since flash, the NAND flash is really the technology leader now.

Leading edge capabilities have to be brought up on a NAND flash, we've been doing a lot of work on leading edge capabilities there.

You can see that pretty much in how much our booking has gone towards flash memory.

I think if you would have thought back a couple of years ago, our percentage of flash memory of our--memory of our total would not be nearly as great.

As we go through the nodes, we continue to gain share, as well.

From our share standpoint it's one or two points in each one of the subsequent generations.

Now, where is the share coming from?

The share is really coming from some of the areas where our share is lower, in Etch we're moving ahead particularly in silicon and metal etch this year, we feel like we have a strong set of products there.

In EPI, EPI is being adopted by memory manufacturers, by DRAM memory manufacturers, growing that market dramatically, and our share there has grown, as well.

We see that as an evolving story over the next year, or few years.

Our inspection is growing, new vision now has got seven repeat customers that we're taking share at, and so we're excited about our other new products in inspection, as well, and then in our major areas we feel like we're holding share at a very high level in the other stronghold areas that we've traditionally had.

Thank you.

You bet.

Your next question comes from Gavin Duffy with A.G.

Edwards.

Thanks, guys, for taking the question.

Just quickly, George, what are we saying for the tax rate next quarter?

Pretty much flat.

31% to 32%.

31%, 32%.

And Mike, maybe kind of more a concept question.

You talked about DRAM next year and corporate adoption of this.

So how do you kind of see DRAM maybe playing out over next year?

Would you be more like first half of that like this year or could it be kind of a longer tail?

Well my thinking now is it's going to be a longer tail because Vista adoption in corporate is really going to start in earnest, I think by the middle of the next year and then extend for at least a year.

Most corporations aren't going to do Vista until it is well established and it is really the reliable capability they need.

So I don't think that's going to start until mid-year.

It is going to drive an awful lot of DRAM for corporate capability because of the experience that corporate users want.

Okay, and if I can ask one last one.

We're talking about utilization rates increasing at the foundries, and also record revenues.

Would you think--how much of this would be probably end market demand increasing versus you see this migration of customers towards fab life models where you essentially have a wash in terms of the foundries buying equipment instead of these guys.

Do you think it is more end-user demand helping out?

It is some of both.

Clearly our view is that the current environment and costs of R&D, cost of factories favor the foundry model.

So over a period of time we saw a pretty big rush this year with a number of companies announcing that they won't do new semiconductor factories, they'll move to a foundry model of one type or the other, but I think in the overall run it is going to be consumer devices growing the demand and also a substantial portion of the foundry growth from customers moving to that model and away from the traditional IDM model.

Hard to say a percentage at this point, Gavin.

Okay, I appreciate it, thanks, Mike.

Your next question comes from James Covello with Goldman Sachs and Company.

Good afternoon, guys, thanks so much.

Just two quick questions, first, George, if I go from your revenue guidance to your EPS guidance it implies either a little bit higher OpEx or a little bit lower gross margins.

Is it tilted toward one or the other of those?

It would be more towards margin on the segment mix.

I think what you see is what we've said is guidance at, let's say, let us go to 29 to 34, which is a difference there.

You've got lower revenue accounting for about two-thirds of that and then mix where you have silicon going down, which was very, very strong, and you have--we said we think fab solutions and display will be up.

So that trade-off is where you get the mix impact.

Okay.

Thanks, and then the follow-up, Mike, relative to the commentary about memory spending you talk about the willingness of memory customers continue to spend.

Now, there has been four or five DRAM customers that have come out and given '08 CapEx guidance it's been much, much lower than what they spent in '07, and while four or five is by no means a big enough sample size to draw any kind of conclusions, at least those four of five, which I think represent about 20% or 25% of the memory spending are suggesting CapEx down between 30% and 50%.

Is that being reflected in their current order patterns?

Do you think they're just taking a conservative approach?

How would you have us think about that?

Well, a lot of the quarter to quarter movement is just timing of investment.

I think I have to see how the environment shakes out in the next six months here before we really judge 2008.

But one thing when you talk to the memory manufacturers, if there is bit growth, if there is bit demand, they're going to invest the capacity because they know that if they don't, their share and their position in the market is going to deteriorate relatively rapidly, and you can see that already with the--how the share is shifted around in the various memory players in the last year or two years with some people used to have close to 20%, now are under 10.

They didn't invest and their share has dramatically dropped off.

But then again, Mike, specific to the companies that are guiding '08 CapEx a lot lower, how does that mesh with their need to continue to spend?

Oh, well, I'm not--it is pretty difficult to comment exactly on each one of the three or four companies, but when you look at the major companies who represent the other 80%, I think they are still looking at trying to meet a very aggressive bit demand growth.

Bit demand growth has been so aggressive in this first half, this year, and I thought it would initially slow down in the second half, and I don't see it slowing down.

Okay.

Thanks so much.

Your next question comes from Jesse Pichel with Piper Jaffray.

Thank you for taking my question and congratulations on guiding up your solar goal to $600 million.

Two questions, I'm interested to know if you're accelerating your sigs development activities as evidenced by some key hires you've made?

Well, we're really right now focussed on both the crystalline and silicon and the thin-film silicon approaches.

Certainly we think that all different kinds of materials and material modification are going to play into the solar landscape over a period of time, and we want to--our goal is to be the technology leader in solar, and in order to do that, we really have to be knowledgeable about--and really leading in all the key areas.

But to be the technology leader you have to be the leader that drives down the end cost per watt, and we're going to use whatever means that are at our disposal to be able to do that.

But at this moment we think thin-film silicon is the best path to be there.

We think for installation where there is limited space, crystalline silicon is the best path to the lowest cost per watt for that kind of application, and there is a lot of other technologies coming on.

We're going to be there with those technologies in the markets that they can play in.

Just to refine my question a bit.

I was referring to copper indium gallide galium solinade type materials.

I know what you were referring to.

Okay, all right, and the second question is, do you anticipate a solar fab solutions opportunity, perhaps, source targets, or wire (inaudible)?

We do view that there is an excellent opportunity for fab solutions in the solar market.

At this point it is a little bit too early for us to give you a makeup of that business, but certainly service spares abatement consumables of all different kinds can fit into that market and we're exploring all of those.

Thank you.

Operator, we'll take one more question and make our closing remarks.

Your last question comes from Satya Kumar with Credit Suisse.

Yes, hi, thanks for taking my follow-up.

I just have an observation for the last question.

It seems like we're in somewhat unique times here.

Following up on another question, it seems like some of the memory companies, (inaudible) have good CapEx, but some others that NAND folks and other Taiwanese folks everything is flat.

Seems like logic and foundry is down a lot this year.

And it seems like displays down over 50% the last couple of years.

Going back to the best of your recollection, do you recollect a time in the past where you've seen such a wide divergence between all the different sectors, where one is at peak and one is at trough and going forward in '08 when you look at these end markets, semi CapEx, and display CapEx, ex-solar, what do you see as your served available CapEx growth in '08?

Okay.

Well, I think, first of all, there is different things that are driving the different parts of the markets.

In memory, I think if we just go to NAND flash to start with, the ability to have mobile storage and large amounts of mobile storage is driving NAND flash, I just look at the iPhone with 8-gig, I can't imagine that's going to stay anywhere close to that over any kind of period of time.

It is going to ramp dramatically.

Will it have a large impact on overall cell phone sales?

I don't know.

I think that it will as more features come in, but the bigger and much bigger impact will be on NAND flash, because of the increased need for storage in devices that people carry around.

DRAM is still, I think, while it is been increasingly adopted in cell phones, the big drivers still going to be big PCs for the next 18 months, so this is a different kind of a cycle and a new operating system drives it up faster than just the simple unit growth.

In other kind of devices that are really affecting foundries, it becomes more just how many units of computers and cell phones are increasing, and those markets are increasing more closely to 10% a year, and so there is different factors that are driving the different markets and I do think that that is a fairly major change in our environment, that it is not as uniform, maybe, as it has been in the past.

Display, I think it is a little bit different in that it's more of the old-fashioned supply and demand capacity getting ahead of itself and then having to absorb the capacity with growth in the market.

Overall, when I look at WFE, wafer fab equipment spending for 2007, is kind of up 5%, Applied Materials is going to be up in our silicon systems business about 10%.

Overall this is going to be our best revenue year of all time.

So how that's going to extend into 2008, if the things that we think are going to happen, we think that the growth is going to be relatively similar to 2007, but, boy, it is way too early to make a solid projection on that.

Okay.

Thank you.

Thank you.

We would like to thank all of you for joining us on the discussion of Applied Materials financial results and would like to remind you that a replay of this call and the supporting slide package will be available on our website until 5:00 today, and will remain posted until August 28th.

Also, please remember to hold the date of January 17, 2008, for our Analysts Day.

We'll hold a meeting in New York City and we'll be publishing more details during the fourth quarter.

Thank you for your interest in Applied Materials, this concludes our call.

Thank you, this concludes today's conference call.

You may now disconnect.